LNKD | Guidance = Recession

Takeaway:Guidance implies a recession or is an egregious sandbag. Either way, there may not be much left to play for this year in either direction.

KEY POINTS

4Q15 = REALLY MESSY: LNKD produced a relatively small top-line beat on what appeared to be a soft 4Q15 guide when they issued it. During the call, mgmt introduced a lot noise through the announced sunset of its Lead Accelerator product and what sounded/read as its plan to stop disclosing LCS accounts. Mgmt also stated that Talent Solutions add-ons and renewals both declined on a y/y basis; both factors are reflected in LNKD’s ARPA, which suggests the selling environment is deteriorating.

GUIDANCE = RECESSION: LNKD’s Talent Solutions guidance breakdown is calling for a sharp deceleration in organic revenue growth from 32% in 4Q15 to ~20% in 2016. That’s basically implying a recession since its guidance translates to sharply declining ARPA and/or net new LCS Account growth; at a magnitude that is well in excess of anything it's ever reported for either of those metrics (see analysis below). More likely than not, this is an egregiously sandbagged guidance release given how sudden the deceleration is that's baked into it.

NOT SURE WHAT'S LEFT TO PLAY FOR: On either the short or long side. The sandbag/recession guide should give LNKD at least a couple quarters of breathing room before another short opportunity might emerge. But even if LNKD winds up producing upside over the next two prints, we're not sure anyone is really going to chase that with this print in the rear view mirror and macro concerns looming. That said, we're staying on the sidelines for now.

Let us know if you have any questions or would like to discuss in more detail.

Hesham Shaaban, CFA@HedgeyeInternet

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02/05/16 08:29 AM EST

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The Macro Show Replay | February 5, 2016

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So if you back out the 3 of 10 S&P Sectors that don’t have profit recessions trending, you have no earnings growth in the SP500 at all. Isn’t it funny how a sentence like that sounds even though it’s precisely how the “Ex-Energy” crowd has been telling stories?"

When Bad Is Bad

Not everyone thinks about our profession that way. There’s a comfort in consensus. And there’s discomfort in the idea of risking fluffy compensation structures.

When it comes to the now consensus debate about the timing of the next US #Recession, it was far better to have been alone considering this probability 3-6 months ago.

Today, even the Financials Times (FT) is running a headline that says “Yes, the risk of a US Recession is low. But It’s Rising.” And that, as Darius Dale tweeted in response, “is precisely the point – the market prices in rising or falling risks, not absolute probabilities.”

Click here to join Hedgeye CEO Keith McCullough live on The Macro Show at 9am.

Back to the Global Macro Grind…

For those of you who are new to our Independent Research #Process, alongside chaos theory, one of the fulcrum points of what we do is called Rate of Change. Math people call it calculus.

Both economic and market history will remind you that it’s not whether things are “good” or “bad” that matters most; it’s whether things are getting better or worse. In other words:

If the growth data is slowing from its cycle peak, the probability of a US Recession is rising

If the growth is slowing at a slower rate from its cycle low, the probability of an economic acceleration rises

No, measuring cycle peaks and lows isn’t easy. It’s a grind. It requires both flexibility and patience. While the consensus that tends to miss the turns wants to price everything that they missed in using “valuation” (i.e. an absolute), it’s better to ignore them.

While many will be navel gazing at today’s US jobs report, that’s not what matters most in handicapping the probability of a US stock market crash (> 20% decline from its cycle peak) – corporate profits and credit spreads do.

In terms of the US profit #Recession, here’s the update now that 308 of 500 S&P Companies have reported:

Total SALES -4.7%, EPS -6.4% (both metrics slowed since I updated you on earnings season earlier in the week)

So if you back out the 3 of 10 S&P Sectors that don’t have profit recessions trending, you have no earnings growth in the SP500 at all. Isn’t it funny how a sentence like that sounds even though it’s precisely how the “Ex-Energy” crowd has been telling stories?

A better question is why an over-owned sector like Healthcare continues to flash bearish divergences (under-performing other sectors) in 2016? That’s a rate of change answer too: earnings are going from great to good.

To summarize how our Research Team speaks internally (i.e. mathematically):

When something goes from great to good, that’s bad

When something goes from good to bad, that’s really bad

When something goes from bad to less bad, that’s good

And, of course, when something goes from good to great – well that’s just great!

Back to what consensus (and the Fed, since Yellen is basically a Labor Economist) will be focused on today, don’t forget the following rate of change realities:

Most employment data is the most lagging of #LateCycle economic data you can measure anyway

In other words, the peak of the US Labor Cycle is already in. The Bond Market gets that. It’s already priced in the #LateCycle slow-down call we made last year via A) long-term yields falling and B) credit spreads widening.

And unless your assumption is that we’re never going to have another recession, you’re just going to be wasting your time arguing with people who missed the most important part of calling for probabilities of a #Recession rising – the top.

When the economic growth data has already gone from great, to good, to bad – markets price bad news as bad, until the worst of the data has been discounted. And since it’s still “good”, US Labor data has a long way to go before bad gets less bad.

Our immediate-term Global Macro Risk Ranges are now:

UST 10yr Yield 1.81-1.96%

SPX 1

NASDAQ 4 USD 96.19-98.66 Oil (WTI) 28.73-34.49

Gold 1110-1160

Best of luck out there today,

KM

Keith R. McCullough Chief Executive Officer

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02/05/16 07:31 AM EST

What Could Be Bullish?

Client Talking Points

JAPAN

What is breaking really bad is the Japanese assumption that they can print to infinity and beyond and get stock market inflation. The Nikkei is down for the 4th straight session, -1.3% overnight, and testing crash mode (again) at -19.3% since July.

UST 10YR

The UST 10YR Yield is down at 1.85% getting ahead of the jobs report implies that buy-side expectations are for another rate of change slow-down in NFP. Don’t forget that no matter what the absolutists have to say about this print, NFP growth peaked at 2.34% in FEB of 2015 – add to Long Bond positions on all short-sighted rallies in yields.

*Tune into The Macro Show with Hedgeye CEO Keith McCullough live in the studio at 9:00AM ET - CLICK HERE.

Asset Allocation

CASH

63%

US EQUITIES

0%

INTL EQUITIES

0%

COMMODITIES

0%

FIXED INCOME

23%

INTL CURRENCIES

14%

Top Long Ideas

Company

Ticker

Sector

Duration

XLU

After a busy week of domestic data, you probably don’t need us to tell you that growth continues to slow. Despite the short-covering squeeze in energy stocks, Utilities (XLU) closed out January as the only sector in positive territory (+5%), other than Consumer Staples which eeked out a +0.5% gain. It was an awful start to the year for the S&P 500 (-5%). Don’t expect +10% of relative outperformance every month, but if you stuck with us on this trade, you’re in much better shape than most.

GIS

GIS remains one of our top Long ideas in the consumer staples space. As we have continued to say it boasts style factors that are ideal in turbulent times; high market cap, low beta and liquidity.

Recently, General Mills has been attacked by Chobani commercials, claiming that Yoplait yogurt contains the same ingredients used in pesticide. GIS filed a false advertising lawsuit against Chobani demanding that they stop showing that commercial because it could be detrimental to sales. GIS just got word that a federal judge has barred Chobani from continuing the ad campaign. This is a win for GIS, but it is unclear right now if there was any damage done to the brand. At this time we do not believe it had any serious impact on the company. We will keep you informed of any material information regarding this lawsuit as it moves forward.

TLT

Long-Term Treasuries (TLT) continues to preserve capital against the slow-moving trainwreck in Junk Bonds (JNK). Week-over-week, 10-year bond yields crashed 13 basis points to 1.92%. That helped lift the best play on U.S. growth slowing (TLT) by 0.85% on the week as credit spreads continued to widen (JNK gained +0.76% on the week, underperforming TLT marginally on a relative basis).

QUOTE OF THE DAY

STAT OF THE DAY

Tough times in Brazil are impacting Carnival, Petroleo Brasileiro SA, the state oil giant known as Petrobras, says it has cut its Carnival budget by 80%.

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